“All good things must come to an end.”
This modified ancient English proverb dates back as far as 1374. And sadly, it applies to modern day term life insurance policies as well. Sort of.
If you’ve recently come to the end of your term life insurance policy — congratulations! You’ve outlived your policy. The best type of term life insurance is the kind you never end up using but is there if you and your family need it.
As you may know by now, term life insurance doesn’t always “expire” at the end of the term period. What does expire, however, is the low rate you’ve been paying. The term period is set when you purchase the policy and typically lasts for 10, 15, 20, 25, 30, 35 or even 40 years. After that, you can usually continue the policy on a year-to-year basis to age 95, but at a much higher cost.
So Now What?
Well, that depends on your life insurance needs. Even though your term period has expired, your policy may still have value to you. If you find that you still need life insurance protection at this point, you do have options for extending, converting or renewing the coverage.
Extending Your Coverage
Most term life insurance policies do not technically expire until the Insured reaches age 95. This means you can keep your existing policy in force by continuing to pay the premiums.
Pros – This option may be worthwhile if you find you need the coverage for a short period, say 2-3 years. Also, this may be a good choice (or your only choice) if you cannot qualify for a new policy due to a change in health.
Cons – The cost to keep the policy in force will increase – significantly. And it will continue to increase each year as you age. Check your policy for a page that shows the estimated annual premiums for the policy term and the years that follow.
Converting Your Coverage
Nearly all term life insurance policies issued today include a conversion option, also called an exchange option. If your policy was issued more than ten years ago, be sure to check if it includes this option.
This option allows you to convert your term life policy to a permanent life policy, typically a Universal Life (UL) policy. Most companies have select UL policies available for conversion. Some companies, such as MetLife, allow conversion to any UL policy in their portfolio. Be sure to check with your insurance company to see which policies are available for conversion.
Conversions guidelines vary by the life insurance company. The most common are:
- Entire Term – This allows you to convert your policy at any time during the policy term (BEFORE expiration).
- Period – This allows you to convert your policy for a certain period – say, the first five years of the policy term.
- Specific Age – This allows you to convert your policy up until a specific age, typically age 70.
One of the most important things to remember about conversion is you need to begin the process before your term expires. It’s best to start looking at policies and costs at least a year in advance. This will help you keep your options open at the policy end draws near.
Pros – Clearly, the biggest benefit of conversion is that you do not have to provide evidence of insurability to convert to a permanent policy, provided the coverage amount remains the same or less. In other words, you do not need to show good health as you did when you first bought your term life policy. So, no application and no exam! That makes conversion the go-to option for people who need the continued coverage but have developed severe medical conditions or are otherwise not in good health.
Cons – Some life insurance companies limit the number of UL policies available for conversion. So you may not necessarily get the features you would like in a permanent policy or the best available policy. You may also have to pay more than you would for a non-eligible UL policy.
Speaking of paying more, your new permanent policy will be more expensive than the term life policy you had. The new policy rate will be based on your age at the time of conversion. Plus, permanent life insurance policies simply cost more than term life policies. However, the cost may still end up being lower than the cost to continue your term life policy on a year-to-year basis. So make sure to check the rates for both options.
Renewing Your Coverage
Usually, the least expensive option for keeping your life insurance coverage in force is to apply for a new term life policy. You can either apply to the same company utilizing their Exchange or Re-Entry provision, or you can choose a different company. There are no clear advantages to staying with the same company, as both applications will likely require an in-home exam to show you are still in good health. We always advise people to shop around for the best rate, just as you did 10, 15 or 20 years ago.
Pros – This is almost always the least expensive option, especially if you are under age 70.
Cons – You have to prove you are still in good health (insurability). If your health has deteriorated, you may lose out on the cost savings or be denied coverage altogether.
So the three most likely options for you to continue coverage when your existing life insurance policy ends are:
- Extend the policy on a year-to-year basis – Expensive, but a simple way to keep your coverage going.
- Convert the policy to a permanent policy – Expensive, but you can get lifetime coverage even if you are in poor health.
- Start a new term policy – Less expensive, but you must be in good health to qualify for a low rate.
Keep these options in mind as your term life insurance policy draws to a close. Remember to consult with your life insurance advisor at least a year in advance, and together make an informed choice!